Client Advisory: ERISA Prudence and Hughes v. Northwestern University

Issue March/April 2022 April 2022 By Evelyn A. Haralampu
Taxation Law Section Review
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Evelyn A. Haralampu

The U.S. Supreme Court recently heard arguments in Hughes v. Northwestern University, in which the Seventh Circuit Court of Appeals had rejected claims that the fiduciaries of two Northwestern University retirement plans had breached their fiduciary duty under the Employee Retirement Income Security Act of 1974 (ERISA). The complaint alleged that the fiduciaries had wasted plan assets by offering many options at retail, rather than at the cheaper institutional cost, overpaying multiple record-keepers, and offering plan participants a confusing number of investment options. At issue was whether a claim of fiduciary breach under ERISA could be brought against defined contribution plans in which participants chose the investments of their own accounts. The courts below held there was no breach, by law, and the claims were dismissed. 

The Supreme Court unanimously reversed, concluding that the Seventh Circuit could not excuse Northwestern fiduciaries from imprudent decisions under ERISA because plan participants made investment choices for their own accounts. Rather, the actions of the Northwestern fiduciaries must be reviewed under Tibble v. Edison International, 575 U.S. 523, that requires fiduciaries to monitor each investment option and remove imprudent choices. A collection of investment options that includes prudent choices does not erase the breach of fiduciary duty of also offering imprudent investment options. 

The Supreme Court views ERISA fiduciary duty as requiring prudent decision-making under the circumstances prevailing when the fiduciary acts. The fiduciary must continually monitor investment choices for all their features, including cost, recognizing that there are tradeoffs that a fiduciary must also consider. 

The allegations that may give rise to a breach of ERISA fiduciary duty to act prudently in this case are:

  1. The fiduciaries failed to monitor record-keeping fees, resulting in extraordinarily high fees to participants that could have been avoided.
  2. The fiduciaries offered retail funds to participants when they could have offered the same funds at lower, institutional rates.
  3. By offering 400 investment options, the fiduciaries confused plan participants, resulting in their poor investment choices.

The Takeaway:

The fiduciary standard of prudence under ERISA requires constant monitoring, considers the circumstances at the time of a fiduciary’s decision, and may take into account various tradeoffs. The demands of ERISA prudence do not reflect modern portfolio management that seeks to manage risk by examining the portfolio as a whole. Rather, ERISA fiduciaries have a duty to make available only prudent investment choices to plan participants investing their own accounts. Investment choices deemed imprudent are not rehabilitated by looking at all the investment options available to participants as a whole.
The tension between choosing prudent investments and constantly monitoring fiduciary decisions against changing circumstances, tradeoffs and competing priorities offers a significant challenge to plan fiduciaries’ decision-making. Documenting the reasons for decisions, monitoring them, and adjusting course to maintain prudence are keys to meeting the high standard of the law. 

Evelyn A. Haralampu is a partner of Burns & Levinson LLP, where she specializes in law related to compensation, employee benefits and executive compensation. She has authored a number of articles, including a chapter on the Employee Retirement Income Security Act of 1974 in the Massachusetts Continuing Legal Education treatise, Massachusetts Employment Law.